Box sets » Inflation

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2020 Economic and fiscal outlook, we adjusted our economy forecast to account for the material increase in departmental spending and tax policy changes on GDP and inflation. In addition to this, our business investment forecast incorporates the reversal of the planned cut in corporation tax, increases in the structures and buildings allowance and R&D tax credits.
By issuing gilts linked to the Retail Prices Index (RPI) the Government exposes itself to inflation risks on interest payments. In this box, we looked at how changes to the formula for calculating RPI would affect our forecast.

Economy categories: Inflation

Fiscal categories: Debt interest spending

Impact of post-referendum rise in inflation on the public
One unforeseen economic development affecting our March 2016 forecast was the upside surprise in inflation in 2017-18 as a result of the fall in the exchange rate. This box described the effect of that surprise on receipts, spending and borrowing.
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our October 2018 Economic and fiscal outlook, economy forecast adjustments included the effects of looser fiscal policy on GDP and inflation, the effects of capital allowances on business investment, the effects of tax policy changes on inflation and the effects of the extension of the Help to Buy scheme on the housing market.
Post-referendum forecast judgements
In the November 2016 EFO we made a number of judgements about how the vote to leave the EU would effect the economy in the near-term. This box from our March 2018 EFO compared these judgements against the outturn data that we had received since then, finding that most of these judgements were broadly on track.
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our November 2017 Economic and fiscal outlook, economy forecast adjustments included the effects of looser fiscal policy on GDP, the effects of tax policy changes on inflation and the effects of stamp duty relief for first-time-buyers on house prices.
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2017 Economic and Fiscal Outlook, we adjusted our economy forecast for the effects of reducing the ‘personal injury discount rate’.

Economy categories: Inflation

Fiscal categories: Public spending, Departmental spending

Cross-cutting categories: Financial sector, Discount rates

The personal injury discount rate
In February 2017, just ahead of the Spring Budget and our March Economic and fiscal outlook, the Ministry of Justice announced that the ‘personal injury discount rate’ would be reduced from 2.5 to minus 0.75 per cent (in inflation-adjusted real terms). This box explained the direct and indirect effects of this change on our receipts and public spending forecasts.
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our November 2016 Economic and Fiscal Outlook, economy forecast adjustments included the effects of looser fiscal policy on GDP and the effects of tax policy changes on inflation.
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2016 Economic and Fiscal Outlook, we made a number of economy forecast adjustments to GDP, business investment, wage growth, inflation and the housing market.
International comparisons of the government consumption deflator
The government consumption deflator measures the implied price of government services. International comparisons show that different methodologies for deriving the government consumption deflator affect the extent to which nominal changes are interpreted as driven by changes in prices as opposed to volumes. This box outlined how these methodologies affected government consumption compared to pre-recession averages for six leading industrial countries.
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In the 2015 Autumn Statement and Spending Review, we made a number of adjustments to real and nominal GDP, the labour market, inflation, and the housing market.
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In the July 2015 Economic and fiscal outlook, we made a number of adjustments to real and nominal GDP, the labour market, inflation, business and residential investment, and the housing market.
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2015 Economic and Fiscal Outlook, we made adjustments to nominal GDP, inflation and North sea production.
Revised assumption for the long-run wedge between RPI and CPI inflation
RPI inflation differs from CPI inflation for a number of reasons. Collectively the difference between the two measures is refered to as the 'wedge'. In light of more evidence this box, from our March 2015 Economic and fiscal outlook, re-examined historical contributions to the 'wedge' and set out our latest assumptions for the long-run difference between the two measures.

Economy categories: Inflation

Cross-cutting categories: Forecast process

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our December 2014 Economic and Fiscal Outlook, we made adjustments to property transactions and residential investment in light of reforms to stamp duty land tax
External agencies’ forecast evaluations
Each autumn, we publish our Forecast evaluation report (FER), a detailed examination of the performance of past economic and fiscal forecasts relative to the latest outturn data. This box discussed the OECD's and Bank of England's forecast errors, their explanations for these errors, and the lessons forecasters have learnt from the errors.

Economy categories: Nominal GDP, Inflation

Cross-cutting categories: External forecasts

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2014 Economic and Fiscal Outlook, we made adjustments to inflation and business investment.
On 7 August 2013, the Bank of England announced that it would not consider raising Bank Rate, then at 0.5 per cent, until the unemployment rate had fallen to 7.0 per cent. However, the Bank also detailed certain conditions, which if breached, would make it consider tightening monetary policy sooner. This box, from our December 2013 Economic and fiscal outlook, examined where our forecast stood in relation to these conditions.

Economy categories: Labour market, Employment and unemployment, Inflation, Interest rates

Cross-cutting categories: Monetary policy

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our December 2013 Economic and Fiscal Outlook, we adjusted our inflation forecast to reflect changes in fuel duty.
Why has inflation been higher in the UK than the euro area?
From late-2008 to 2013, the rate of CPI inflation in the UK had been consistently higher than the euro area equivalent measure. This box, published in our December 2013 Economic and fiscal outlook, outlined a number of factors which had contributed to the divergence including exchange rate movements, changes in VAT and utility prices.

Economy categories: Inflation

Cross-cutting categories: International comparisons

How has the story changed since last year?
In our 2012 Forecast Evaluation Report, we noted that nominal GDP had held up closer to our June 2010 forecast than real GDP, helping to explain why our fiscal forecasts out to 2011-12 had remained broadly on track. This box in our 2013 Forecast Evaluation Report discussed how this assessment changed in light of revisions to GDP data. While nominal GDP now appeared to be weaker than forecast, the relatively tax-rich components - such as nominal consumption and wages and salaries - held up relatively well.
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2013 Economic and Fiscal Outlook, we made adjustments to our forecasts of real GDP, business investment and inflation
In October 2011, we published our first Forecast evaluation report (FER). This box summarised the key findings, including a discussion of weaker than expected GDP growth and why, despite this, public sector borrowing has fallen broadly as we expected it would.
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our December 2012 Economic and Fiscal Outlook, we made adjustments to our forecasts of real GDP, inflation and property transactions
Government consumption
In the two years before our December 2012 forecast, real government consumption held up more than we had expected, with reductions in nominal government consumption affecting prices to a greater extent than we forecast. This box set out how these outturns would have been affected by the way the Office for National Statistics measures real government consumption, a large part of which is based on 'direct' measures of government activity.
In 2012 the ONS carried out a range of methodological development work relating to consumer prices indices. This box summarised some of the key elements, including work addressing the 'formula effect' which had made an increasing contribution to the CPI-RPI 'wedge' in 2010 and 2011. This box also discussed ONS analysis and recommendations from Consumer Prices Advisory Committee on the appropriate measurement of owner occupiers’ housing (OOH) costs and their inclusion in a new index of consumer prices.

Economy categories: Inflation

Cross-cutting categories: Data revisions, Experimental statistics

In recent years, the government consumption deflator had been weaker than we expected. This box set out our assumption that the weakness of the government consumption deflator was likely to persist over the forecast period. The box also reviewed the outlook for the household consumption deflator and explained our assumption that this would be broadly equal to CPI inflation in the long run. Taken together with our assumptions for other deflators, these assumptions implied a medium-term GDP deflator growth assumption of 2 per cent, revised down from a previous assumption of 2.5 per cent

Economy categories: Inflation, GDP deflator

Cross-cutting categories: Forecast process

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2012 Economic and Fiscal Outlook, we made adjustments to our forecasts of real GDP, business investment and inflation.
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our November 2011 Economic and Fiscal Outlook, we made adjustments to our forecasts of inflation and property transactions.
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2011 Economic and Fiscal Outlook, we made adjustments to our forecast of inflation.

Economy categories: Inflation

Fiscal categories: Receipts, Fuel duty, Income tax, Corporation tax

Consumer prices index excluding indirect taxes (CPIY)
In the years prior to our March 2011 forecast there had been a number of changes to the rate of VAT, which affected CPI inflation. The Consumer Price Index excluding indirect taxes (CPIY) provides a measure of inflationary pressures excluding the effects that policy changes have on the CPI measure. This box considered how changes in VAT had contributed to the difference between CPIY and CPI at the time and what this meant for underlying inflationary pressures.

Economy categories: Inflation

The long-run differences between the CPI and RPI
One of the key differences between the CPI and RPI inflation measures arises from the formulae used to construct the indices. In the year leading up to our March 2011 forecast, the contribution of this 'formula effect' to the divergence between CPI and RPI inflation had increased. This box explained the possible implications for our long-run assumption about the CPI-RPI wedge and our inflation forecast.

Economy categories: Inflation

In our central forecast, interest rates are assumed to evolve in line with financial market expectations. For alternative economic scenarios which involve different paths for the output gap and inflation, it is useful to specify rules for the way monetary policy is set and for how output and employment will respond. In this box, we set out the rules that governed those relationships in the scenarios we analysed in the March 2011 Economic and fiscal outlook: a persistent inflation scenario and a weak euro scenario.
This box set out the various impacts that higher inflation has on the public finances. These include direct effects (e.g. on income tax and debt interest spending), the impact on nominal tax bases (such as household consumption) and the impact on departmental spending.